Ontario minister Brad Duguid indicates crowdfunding support

With the U.S. heading in this direction, it’s really important that Ontario keep pace if not even try to get out in front

The Ontario government appears set to support changes to securities laws to allow everyday investors to buy small ownership stakes in early-stage companies not yet ready to list on public markets, a move that could help prevent the potential drain of Canadian startups south of the border.

At a conference in Toronto Thursday morning, Brad Duguid, minister of economic development and innovation, spoke about the potential benefits that equity-based crowdfunding provides for entrepreneurs and said once the Ontario Securities Commission completes a review, the provincial government would look at ways to move forward with changes.

The minister told the audience at the Technicity conference that the changes could even be in place before changes to U.S. laws under the Jumpstart Our Business Startups (or JOBS) Act come into force.

“With the U.S. heading in this direction, it’s really important that Ontario keep pace if not even try to get out in front if we can do that in a way that ensures protection for consumers and investors,” Mr. Duguid said in an interview.

The JOBS legislation, passed in April, is intended to permit non-accredited or non-sophisticated investors to buy small equity stakes in companies without the businesses going through the costly process of preparing a prospectus for a public listing.

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It is a new way of raising money for entrepreneurial ventures that is gaining international attention, prompted in part by another type of crowdfunding offered by Websites like Kickstarter, where Canadian-born Eric Migicovsky raised more than $10-million for his Pebble watch project earlier this year.

But the Kickstarter model lets backers pre-order a product or make a donation to a project, not take an equity stake in a business.

With a dearth of early-stage capital and many everyday investors hoping to get in early on the next Facebook or Twitter, there is a growing call for rules to allow entrepreneurs to solicit small-scale investments from the online crowd.

Canadian proponents of crowdfunding say that if securities regulators don’t act quickly to keep pace with the U.S. changes, innovators will simply head south of the border.

But consumer advocates warn of the potential for fraud, given that equity crowdfunding models typically don’t require audited financial statements or the more extensive due diligence associated with preparing a prospectus.

The U.S. Securities and Exchange Commission is in the midst of a rule-making period before the JOBS Act changes come into force. It was initially expected to be completed around the end of the year, but many now expect it will not wrap up until mid-2013.

The OSC is undertaking its own review of prospects exemptions that allow for investment absent a prospectus and in June it announced plans to broaden that review.

The securities regulator is an independent body and sets its own timing, Mr. Duguid said, but he noted that the government has made clear its interest in moving quickly to pursue equity-based crowdfunding — if appropriate.

“They [the OSC] certainly are aware that the premier and government wants to ensure that should we recommend that we move forward with this tool, that we do it as soon as possible to ensure that we are not disadvantaged if the U.S. are to move ahead of us,” he said.

Jill Homenuk, director of communications at the OSC, said Thursday the regulator plans to publish a consultation paper in early 2013 to seek feedback on whether it should “adopt any new prospectus exemptions that may assist capital raising for business enterprises while protecting the interests of investors.”

The Technicity conference brought together advocates of equity-based crowdfunding through online platforms including Cindy Gordon, the chair of the Canadian Advanced Technology Alliance’s division Invest CrowdFund Canada, which has been lobbying for legislative change through the country’s securities regulators.

“Everyone’s trying to grapple with how best to put this into play to make sense for the investors, investees and obviously there’s always a concern about fraudulent risk so there needs to be a fair bit of thoughtfulness about this,” she said.

“The good news is there are models and frameworks that the U.S. has architected with the JOBS Act and now it’s been legalized in the Netherlands and Italy and they’re doing it in the U.K. and Australia.”

Darren Westlake, the co-founder of U.K.-based Crowdcube, spoke at the conference and provided an international example with his online crowdfunding platform, which launched in 2010 and has helped 31 companies raise close to $7-million (4.4-million pounds).

For a company to list on the site, they have to provide a business plan and financial forecasts and set a target for how much they want to raise in exchange for a certain percentage of equity in their venture, for example $100,000 for 20%. They have a certain time frame in which to raise that amount and if they do not hit the target, the investors are charged nothing. With about 300 listings to date, about 10% have successfully funded their business through the site.

Crowdcube charges a fee of 5% of the money successfully raised and even used the platform itself last December to raise its own seed round of 320,000 pounds from 162 investors.

Having dozens of early-stage investors (most of which hold non-voting shares) is actually an advantage, Mr. Westlake said.

“We now have 162 advocates of Crowdcube… saying how great we are. So basically you’ve got those people as evangelists.”